Equipment financing is a great way to help your business grow. It can be especially useful for equipment that you need for short term use but don’t want the burden of buying outright.
Equipment finance in Australia is available through many different providers and depending on the equipment type, there are several options for equipment leasing or equipment hire. But before you make any decisions about equipment financing, it’s important to know what the drawbacks are!
The equipment finance industry has been around for a while and it can be argued that equipment financing is the best way to obtain equipment. There are many benefits to equipment financing, but there are also some drawbacks you should be aware of before deciding if equipment financing is right for your company. In this blog post, we will explore the various drawbacks of equipment financing so you can make an informed decision about whether or not this option is right for you.
What is equipment financing and how does it work
Equipment financing is a way of obtaining the use of specific types of equipment or machinery by spreading the cost of that equipment over a period of time. This type of financing is available for both new and used equipment.
The way it typically works is that you borrow money from a lender in order to purchase the equipment. The lender will then give you a set number of years (usually 3-5) to pay back the loan, along with interest. At the end of that period, you will own the equipment outright.
The drawbacks of equipment financing
1. Equipment financing may not be available for all types of equipment
There are a few things to keep in mind when looking for equipment finance. Not all types of equipment will be eligible, and the amount you’re able to borrow may be limited. In addition, you’ll likely need a good credit score to be approved.
That said, there are a number of reputable lenders who offer equipment financing in Australia for various types of equipment. So if you’re in the market for new machinery or technology, it’s worth exploring your options. Get in touch with a lending specialist today to learn more about your options.
2. The interest rate on the loan is often higher than a standard bank loan
There are a few reasons why the interest rate on an equipment finance loan might be higher than a standard bank loan. One reason is that the lender is taking on more risk when they finance equipment, since the equipment may not be as easily sold as, say, cash in hand. Additionally, the lender may have to charge a higher interest rate to make up for the fact that there’s less money available to lend out (since financing equipment means tying up funds for a longer period of time).
3. You will need to have collateral to secure the loan, which can limit your borrowing power
Equipment financing is a type of collateralized loan where the equipment, rather than cash, is put up as collateral. This means that if you default on your payments it will be repossessed and sold to repay your creditors instead of using what was borrowed to buy more inventory.
Some lenders may be willing to finance equipment without requiring collateral, but the interest rates on these loans will be much higher. It’s always best to discuss your options with a qualified lender to find the best financing solution for your business.
4. It is possible that you are required to purchase insurance against loss or damage of the equipment being financed
Equipment financing often comes with insurance coverage, which you may be required to purchase in order to finance the equipment. This is true for most lenders and it’s always best to read the fine print before signing any paperwork.
If you don’t want insurance, make sure there are no hidden fees or additional charges associated with financing your purchase – some companies charge an extra monthly premium for this service even though it’s not explicitly stated in their rates!
5. Your credit rating could be negatively affected by defaulting on payment obligations under an equipment finance agreement
There is a possibility that your credit rating could be negatively affected by defaulting on payment obligations under an equipment finance agreement. This is because the lender may take into account factors like your credit history, financial stability, and ability to repay loans in deciding whether or not to extend further financing. If you fail to make timely payments, it can lead to a negative impact on these factors. This could make it more difficult for you to obtain future loans and even result in the loss of some existing ones. So if you have an equipment finance agreement with a lender, it’s important that you keep up with your payments so as not to worsen any potential damage done by default.
